WEEKLY ADVISER: Wanted: Directors Who Work for the Stakeholders

It is time for our contest to pick the next president for a day of Schmidlap National Bank.

The contest question was suggested by Richard B. Foster Jr., a lawyer in Okemos, Mich., and a recent winner himself.

Mr. Foster's latest letter starts by asking, "Where is Schmidlap?" - a question I'll answer shortly. He then suggests an exploration of two topics:

First, how should bank directors be compensated? Should any of their compensation be based on the long-term performance of their bank?

Second, why don't bank directors ask their CEOs tough questions?

Now, under the rules of our contest we cannot give Mr. Foster another full day as president of old Schmidlap - not until every other banker in the nation has had a chance.

Nevertheless, the editors and I have agreed that because of the quality and the relevance of his two questions, he should at least get another 15 minutes beyond his full 24 hours in this august position. We hope you readers will agree.

Now, about Schmidlap.

Schmidlap National Bank is a name I made up during my 31-year stint as a teacher at the Stonier Graduate School of Banking, then at Rutgers and now at the University of Delaware.

I once used some numbers from a real bank's report, identifying the bank and explaining why I disagreed with its policy.

Students who worked for this bank immediately attacked me, saying that my numbers were two years out of date and that I should not criticize the bank for past mistakes.

I decided then and there that I needed a fictitious name, and so invented Schmidlap National as an example of all things good and bad in banking.

It works fine - except in Cincinnati.

There, a famous and generous family named Schmidlap has had a long connection with the Fifth Third bank organization and has been a major benefactor to the city.

I count on the corporate sense of humor (not to mention the high price of legal talent) to keep Fifth Third from suing me.

Now for Mr. Foster's other questions, which deserve serious attention.

I have long felt that bank directors are much too passive.

Whenever I see a bank go under, or even a bank with an overwhelming number of nonperforming loans, I moan: Where was the board?

Sometimes it's only when their bank is on the brink of failure that a board - forced by regulators - finally fires the chief executive.

And often in such cases, the directors give supergenerous golden parachutes. (When the banks go on to fail, of course, the bills for those parachutes are paid by the depositors with large balances, the shareholders, and - through the Federal Deposit Insurance Corp. - the taxpayers.)

Often board members act only when they feel that lawsuits threaten their personal wealth.

Most bank directors fall into one of these categories:

*Inside directors, whose backbones are made of jelly because the CEO sets their salary and ultimately decides whether they get to keep their jobs.

*Celebrities, who do nothing but look good. (They don't want to endanger their sinecures by rocking the boat.)

*People with close connections to the CEO - either friends or lawyers, accountants, or others whose fees from the bank depend on staying in the boss' good graces.

The bottom line is that a supposed oversight group is made up of people far likelier to be loyal to the CEO than to the bank's stakeholders - its shareholders, employees, and community.

On the issue of directors' remuneration: As Mr. Foster points out, it frequently has no correlation whatsoever with the success or future potential of the bank.

This, then, is our contest question:

What is your bank doing to give its directors the necessary backbone and to link their remuneration with the success of the bank?

Fax your responses to 908-273-7309 or mail them to Paul S. Nadler, 14 Friar Tuck Circle, Summit, N.J. 07901. You, too, can join Richard Foster in that exclusive group of presidents for a day of Schmidlap National, and can receive a certificate to prove it.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER